Getting Out, Part One: Americans Renouncing Citizenship

Capital, like information, wants to be free. The idea that it should be limited
to one country has always struck rich people as silly, which is why Swiss bank
accounts, offshore trusts and Caribbean beachfront condos have been perennial
big-sellers.

But lately, the legitimate reasons for investing overseas have been joined
by a couple of new ones: disgust with a ridiculously intrusive US tax system
and worry that the country is becoming something different and less predictable.

As the Wall Street Journal's William McGurn reports below, a small but growing
number of Americans aren't just moving money offshore, but are renouncing citizenship
altogether:

America is no longer as attractive to highly successful people as we like
to think.

People say the dollar isn't what it used to be. Apparently neither is a
United States passport. Last year, nearly 1,800 American expatriates renounced
their citizenship, according to Treasury Department figures.

What gives?

The cheap answer is to blame Barack Obama. After all, during his tenure,
the number of Americans renouncing citizenship has taken a sharp upward turn,
from an average of 482 per year under George W. Bush to 742 in 2009, to 1,534
in 2010 and to 1,788 in 2011. At the least, his calls for hiking taxes on
the wealthy can't be doing anything to discourage this trend.

The other cheap answer is to blame the ever unpopular IRS--instead of the
tax code itself. In the international section of its most recent annual report
to Congress, the agency's National Taxpayer Advocate notes that whether it's
Americans working abroad or foreigners residing here, "taxpayers who are
trying their best to comply simply cannot." The result is that some are "paying
more tax than is legally required, while others may be subject to steep civil
and criminal penalties."

Here's the real issue: When it comes to attracting highly successful people,
America is just not as competitive as we like to think we are. What we need
is a complete rethink.

That rethink begins with a hard look at what these 1,800 citizenship renunciations
are telling us. True, 1,800 is a drop in the bucket compared with either
the number of Americans working abroad or the number of foreigners who are
seeking U.S. citizenship. Still, when it comes to the global inefficiencies
of our tax code, these 1,800 ex-Americans are canaries in the coal mine.

Our tax code--and especially the onerous reporting requirements that come
with it--is turning U.S. citizens into economic lepers. Many foreign banks
refuse us as customers; some investment ventures no longer want us as partners;
and some business opportunities that would have benefited Americans now benefit
others.

For successful foreigners, our global tax regime tells them this: Avoid
entanglements with America. Andrew Mitchel is a Connecticut-based international
tax attorney who blogs on these issues. He says that for someone who has
foreign assets abroad, the cost-benefit analysis doesn't always come out
in America's favor.

"My advice to, say, a small-business man abroad would be to think twice
about acquiring U.S. citizenship," says Mr. Mitchel. "Many of these people
do not realize what that means for their businesses until they start dealing
with the IRS."

All these disincentives flow from a single source: Uncle Sam's insistence
on taxing people and companies for what they earn outside U.S. borders.

Jackie Bugnion, a director with the Geneva-based American Citizens Abroad,
says the U.S. approach makes no sense at either the individual or corporate
level.

At the individual level, says Ms. Bugnion, the IRS imposes a "highly complex,
costly double filing." Even so, it produces little revenue because most Americans
end up owing no taxes at all because of exemptions and what they pay where
they live. Indeed, this is one area where free-marketeers think that America
should be more like Europe, which does not tax its citizens overseas.

At the corporate level, taxing overseas earnings means higher capital costs
for the U.S. Instead of taxing businesses only for what they earn in America,
Ms. Bugnion says, Congress makes things even more complicated by trying to
offset the negatives with occasional measures such as deferred taxation on
profits earned and reinvested overseas.

In short, America is not facing up to the big question: If you are a dynamic
individual with a good business, do you want to be an American--and open
up all your world-wide activities to the IRS--or might you be happy living
and raising your family in a part of the world that welcomes rather than
discourages success? The aforementioned IRS report suggests other countries
are busy answering that question, citing a World Bank study showing that,
unlike ours, "40 economies made it easier to pay taxes last year."

Now the whole notion that someone would give up U.S. citizenship to get
out from the IRS will be taken by some folks as evidence that he or she isn't
worthy of American citizenship. Maybe not. Alas, a focus on the punitive
only blinds us to the larger costs this approach is inflicting on the rest
of society.

Indeed, the whole reason Treasury reports the numbers of Americans renouncing
citizenship instead of the State Department is because Congress--Republicans
as well as Democrats--set it up that way. The aim is to "name and shame." That's
the Berlin Wall approach: The idea that the thrust of U.S. tax law should
be to prevent any American from benefiting from a better deal somewhere else.

That a record 1,800 Americans gave up their citizenship last year suggests
something else: Instead of building walls to keep talent and investment from
getting out, Congress might start treating these as capital we ought to work
to attract.

Some thoughts

This article focuses on our increasingly abusive tax system, and no doubt
that's a big part of the immediate problem. The fact that foreign banks won't
even accept Americans as customers should tell us that we've crossed some very
important lines.

But the other motivation for getting out -- fear that if we and our money
stick around we'll be trapped by capital controls and then impoverished by
inflation and confiscation -- will be the driver going forward. The list of "creeping
fascist" laws that have been proposed and/or passed lately reads like something
out of a bad dystopian novel. Combine this evolving police state with never-ending
wars and ever-rising debt and you have the recipe for a financial collapse/state
of emergency in which no one's capital is safe.

So the escape strategy is evolving to fit the new reality. Where in the past
it seemed reasonable to stick around but move a bit of money offshore, now
the goal is "internationalization," in which not just one's assets but one's
identity is geographically diversified. That means a second passport to go
with foreign real estate and bank accounts, to make a complete break possible
should it be necessary.

John Rubino is author of Clean Money: Picking Winners
in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's
James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday,
January 2008), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a currency trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and
a frequent contributor to Individual Investor, Online Investor,
and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.